New York - Brace yourself. The credit squeeze that almost every financial expert has warned about is here.

Banks are reducing credit lines and refusing to make new loans to everyone from the local used-car dealer to the office-supply store. Unable to float bonds, states, cities, and transportation authorities are postponing everything from pothole repair to airport terminal expansions. Even some students are finding that banks have tightened lending standards for private student loans – something that is particularly affecting schools that serve low-income working adults.

The key question: Can Congress end the gathering credit maelstrom by passing the $700 billion rescue plan? Or is it already too late?

"It's not too late," says Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pa. "But by their initial reaction, Congress made things worse. They have diluted the benefit of finally acting, and it may mean they have to do even more to stem the damage."

On Thursday, President Bush, urging the House to pass the $700 billion rescue package, said the frozen credit markets were hurting business. "They need to have money on a regular basis from their local banker," he said. "People are not lending money to our medium- and small-sized businesses."

Not everyone has felt the squeeze yet. Home buyers with good credit can still get mortgages, although it may require more footwork. The interest-rate gap between commercial bank lending and Treasury bills has eased from record levels a few days ago.

"The damage is not repaired by any stretch, and the markets are wise to hold back on a positive reaction to the Senate passing the rescue bill," says Bob Brusca of Fact & Opinion Economics in New York. "But the economic data is so terrible, the economy looks decisively in a recession, and the market has to deal with that."

Business leaders report the tightening credit milieu is becoming increasingly widespread. "It's more difficult to get a car loan, more difficult to buy large appliances, for small business to finance their purchasing," says John Castellani, president of the Business Roundtable, a Washington association of 160 CEOs of leading US companies.

The auto industry is especially feeling the crunch, with sales falling an average of 27 percent in September. Two states that are particularly hard hit: Florida and California, where buyers are used to tapping home equity lines to finance their vehicles.

Nationally, only 63 percent of consumers applying for a car loan are being approved compared with 83 percent a year ago, says Art Spinella, president of CNW Marketing Research in Bandon, Ore. "It's not that they are bad loans. It's just that no one knows used-car pricing.

The crunch is particularly difficult, he says, for independent auto dealers and used-car dealers. In September alone, he says, nearly 1,000 independents or used-car dealers closed their doors in the US. "They can't get their customers an auto loan," he says.

That's the experience of Gabriel and Michael Elmassih, who own four-month-old Quincy (Mass.) International Auto Sales, which sells used cars. "We probably lost 10 deals in a month because the banks don't approve the car loans," says Gabriel Elmassih.

Credit woes are spreading fairly quickly to the small-business community. In a survey completed in early September, the National Small Business Association found that 32 percent of its members reported worsening bank-loan terms, up from 27 percent in February.

In Portland, Ore., Michael Mathison, production manager of Gango Editions, an art publisher, can attest to the new banking climate. His local bank now looks more closely at his books, including his accounts receivable, which he uses as part of his borrowing base. "They are now saying anything 90 days [past due] we can't use, so we're having to ask other people to pay a little quicker."

Some small businesses have been preparing for tighter restrictions. A week ago, Mark Strong, owner of JLI Electronics, learned that one of his two lines of credit had been cut in half. But he had already paid down debt, ordered supplies in smaller quantities, sold unnecessary equipment, and cut the credit of customers he thought could be affected by a recession.

He expects that his credit lines will be cut further. But he does not expect to lay off anybody. "We're battening down the hatches, that's all," says Mr. Strong, who strongly opposes any bank bailout.

In fact, despite the worsening business climate, many small businesses are continuing to hire, says Michael Alter, president of SurePayroll, a national payroll-services provider in Glenview, Ill., that uses its data to track small business.

Mr. Alter expects the firm's September survey of 20,000 customers will show a hiring rise despite an increase in pessimism. And, he says, their analysis finds that most small businesses are continuing to meet their payroll. "I'm worried about a month from now," he says. "It will get harder unless something gets done."

Banks have also been tightening their underwriting standards for private student loans, and some have been leaving the market altogether. Among the schools most affected are career colleges – private, often for-profit schools. These colleges often serve low-income working adults, who tend to be more likely to have lower credit scores and less ability to pay independently.

But even though these students have been having a harder time accessing private student loans over the past year and a half, it's still very rare for students not to find the funding they need to enroll, says Harris Miller, president of the Career College Association, a trade group in Washington.

States and cities are also waiting for the credit markets to thaw. On Wednesday, California's treasurer warned that the credit crunch posed a looming threat to the state's finances.

"For 10 days, state and local governments have been closed out of credit markets – long-term and short-term – in spite of the fact that they represent no default risk and provide a good tax-free return to investors," said state treasurer Bill Lockyer in a press release.

The loss of long-term credit endangers the ability of the state to follow through on voter-approved projects like road and school building. But the more immediate problem is that the state will run out of cash on Oct. 29, according to the state controller's office, and an additional $7 billion will be needed to carry on operations until spring revenues arrive.

Mr. Lockyer warned that if nothing changed and the state could not borrow, payments for teachers' salaries, police, nursing homes, and other services could be halted.

The controller's office, however, is adopting a calming tone. "We're confident the treasurer will find sufficient funding to meet the state's obligations," says Hallye Jordan, a spokeswoman in Sacramento.